How Deep In Debt Should You Be To File Bankruptcy?

25 February 2021
 Categories: Law, Blog


The term bankruptcy may give the impression that a filer has to be dealing with excessive debt before they can ask the court for relief. However, bankruptcy law works a bit differently than some might imagine. If you're not sure how deep in debt you have to be to file bankruptcy, here are three things you should know before you file.

Qualification for Chapter 7

Notably, the process is initially focused more on whether someone can be ruled in rather than out. Chapter 7 bankruptcy is a process where a trustee will sell a debtor's non-exempt assets. While it's not quite an automatic qualification, there's a very good chance that you will if your current monthly income is less than your state's median income. For example, if you live in a state with a median income of $50,000 per year and your current monthly income is on pace to be $35,000 per year, then you'd likely be eligible for an expedited approval process.

What Happens if You Make More?

Fortunately, it just means that you'll have to submit to a means test. This is an application process where you'll have to show if your aggregate income after allowable expenses is less than $12,850 or 25% of your nonpriority unsecured debt. You'll have to show what your debts are and how much monthly income you currently have, and the court will determine if you're eligible for Chapter 7.

If you don't meet one of the previously mentioned qualifications, a judge may decide that your filing is abusive to the system. You might still be able to file for bankruptcy, though. If the judge doesn't believe your conduct was extreme, meaning you were just trying to get away from your creditors, they can convert the case to a Chapter 13 or 11 filing.

However, it's at the judge's discretion to dismiss the case. They also can deem the worst of the worst cases, usually meaning abusive cases where the petitioner falsified or hid information.

Chapter 13 or 11 Eligibility

The Chapter 13 and 11 processes are meant to restructure debt loads. Chapter 13 is for personal debts, but sole proprietor businesses may also file. To file for Chapter 13, you must have less than $383,175 in unsecured debts, meaning things like utility or credit card bills. You must also have less than $1,149,525 in secured debts, meaning items a creditor can repossess like cars or houses.

Chapter 11 is for restructuring any debt load beyond the Chapter 13 threshold. Unsurprisingly, it is largely used by businesses. However, individuals may also use it.